Merck CEO Frazier Vows ‘Tough’ Innovation Spending

Merck & Co.’s Chief Executive Officer Kenneth Frazier, who took over the top leadership role on Jan. 1, said the company will make “tough” research spending decisions while developing innovative products.

Merck, the second-biggest U.S. drugmaker, will halt development of less promising drugs more quickly, Frazier said today at a Goldman Sachs Group Inc. investor conference in New York. The Whitehouse Station, New Jersey-based company is changing compensation to scientists to prevent expensive late- stage development of weak commercial prospects, he said.

Merck is developing new drugs to replace revenue as it faces generic competition that began last year to blood-pressure pills, Cozaar and Hyzaar, with combined 2009 sales of $3.6 billion. The company is awaiting final-stage test results for experimental medicines to prevent blood clots, increase beneficial forms of cholesterol and treat migraine headaches.

“The only way you can sustain a business like this is through innovation; that doesn’t mean you can just throw money at things,” Frazier said. “Historically, our successes haven’t required us to think as tough about resource allocation.”

Merck hosts regular symposia where its finance experts teach scientists how to seek better return on invested capital, Frazier said. The three-year return is now tied to researchers’ compensation, he said.

Drug Approvals

Pharmaceutical companies face increasingly difficult standards for U.S. approvals for novel drugs. Last year was the first time in a decade that New York-based Pfizer Inc., the world’s largest drugmaker, as well as Merck, Indianapolis-based Eli Lilly & Co. and New York-based Bristol-Myers Squibb Co., each failed to win regulatory backing for a new molecular compound.

Merck secured approval for its Dulera asthma inhaler, which combines two previously approved treatments, and won the right to market drugs for wider indications, said Steven Campanini, a spokesman for Merck, in a telephone interview. The company said today that it received an accelerated six-month review for its experimental hepatitis C treatment.

Merck rose 50 cents, or 1.7 percent, to $37.06 at 4 p.m. in New York Stock Exchange composite trading. The stock has declined 1.6 percent in the past 12 months.

Merck also is “evaluating options” for its consumer- health products unit, Frazier said. That business had $291 million in sales in the third quarter, or 2.6 percent of the company’s total, according to Bloomberg data.

‘Not Global’

“It’s not global enough from our standpoint,” Frazier said. “But it’s a business that we like. We have to look at it to see what role it could play longer term.”

Frazier said his plan to expand in emerging markets such as China will focus on partnerships with companies over acquisitions, which have become too expensive.

“We think it’s hard to make money if you have to buy assets at the top of the market,” Frazier said. “We like partnerships because we get the local expertise. If you buy somebody and then you put them as part of your company, you lose the local expertise, the local presence.”

About 18 percent of sales from drugs and vaccines came from emerging markets in the third quarter. Merck has been shifting focus to outside the U.S. and Europe where there are less pricing pressures from governments and health insurers.

Merck has completed a year of “maximum disruption” after acquiring Schering-Plough Corp. for $49 billion in 2009, Frazier said. The company has said it is eliminating 15,000 jobs and closing facilities.

After the merger of the two sales forces, many representatives were taken off their typical duties to be trained on new products. Frazier said in 2011 he is expecting “even better performance.”

To contact the reporter on this story: Tom Randall in New York at trandall6@bloomberg.net.

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net.

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